| 1 |
BAXTER INTERNATIONAL INC |
Collaborative arrangements
On January 1, 2009, the company adopted a new accounting standard related to collaborative
arrangements, which was required to be applied retrospectively to all periods presented for all
collaborative arrangements existing as of the effective date. The adoption of this new standard
did not result in a change to the company’s historical consolidated financial statements.
In the normal course of business, Baxter enters into collaborative arrangements with third parties.
Certain of these collaborative arrangements include joint operating activities involving active
participation by both partners, where both Baxter and the other entity are exposed to risks and
rewards dependent on the commercial success of the activity. These collaborative arrangements
exist in all three of the company’s segments, take a number of forms and structures, principally
pertain to the joint development and commercialization of new products, and are designed to enhance
and expedite long-term sales and profitability growth.
The collaborative arrangements can broadly be grouped into two categories: those relating to new
product development, and those relating to existing commercial products.
New Product Development Arrangements
The company’s joint new product development and commercialization arrangements generally provide
that Baxter license certain rights to manufacture, market or distribute a specified technology or
product under development. Baxter’s consideration for the rights generally consists of some
combination of up-front payments, ongoing research and development (R&D) cost reimbursements,
royalties, and contingent payments relating to the achievement of specified pre-clinical, clinical,
regulatory approval or sales milestones. Joint steering committees often exist to manage the
various stages and activities of the arrangement. Control over the R&D activities may be shared or
may be performed by Baxter. Baxter generally controls the commercialization phase, sometimes
purchasing raw materials from the collaboration partner.
During the development phase, Baxter’s R&D costs are expensed as incurred. These costs may include
R&D cost reimbursements to the partner, as well as up-front and milestone payments to the partner
prior to the date the product receives regulatory approval. Milestone payments made to the partner
subsequent to regulatory approval are capitalized as other intangible assets and amortized to cost
of sales over the estimated useful life of the related asset. Royalty payments are expensed as
cost of sales when they become due and payable. Any purchases of raw materials from the partner
during the development stage are expensed as R&D, while such purchases during the commercialization
phase are capitalized as inventory and recognized as cost of sales when the related finished
products are sold. Baxter generally records the amount invoiced to the third-party customer for
the finished product as sales, as Baxter is the principal and primary obligor in the arrangement.
Payments to collaborative partners classified in cost of sales were not significant in the nine
months ended September 30, 2009 and 2008. Payments to collaborative partners totaled 6% of total
R&D expense in both the three- and nine-month periods ended September 30, 2009 and 11% and 8% of
total R&D expense in the three- and nine-month periods ended September 30, 2008, respectively. The
payments principally related to the development of tissue repair products, longer-acting forms of
blood clotting proteins to treat hemophilia and a next-generation home hemodialysis device.
Commercial Product Arrangements
The company’s commercial product collaborative arrangements generally provide for a sharing of
manufacturing, marketing or distribution activities between Baxter and the partner, along with a
sharing of the related profits. The nature and split of the shared activities varies, sometimes
split by type of activity and sometimes split by geographic area.
The entity that invoices the third-party customer is generally the principal and primary obligor in
the arrangement and therefore records the invoiced amount as a sale. Cost-sharing payments are
generally recorded in cost of sales. Baxter’s payments to partners under these types of
arrangements totaled less than 1% of total cost of sales in the three- and nine-month periods ended
September 30, 2009 and 2008.
|
| 2 |
Biogen Idec Inc. |
In connection with our business strategy, we have entered into
various collaboration agreements which provide us with rights to
develop, produce and market products using certain know-how,
technology and patent rights maintained by our collaborative
partners. Terms of the various collaboration agreements may
require us to make milestone payments upon the achievement of
certain product research and development objectives and pay
royalties on future sales, if any, of commercial products
resulting from the collaboration.
Effective January 1, 2009, we adopted a newly issued
accounting standard for the accounting and disclosure of an
entity’s collaborative arrangements. This newly issued
standard prescribes that certain transactions between
collaborators be recorded in the income statement on either a
gross or net basis, depending on the characteristics of the
collaboration relationship, and provides for enhanced disclosure
of collaborative relationships. In accordance with this
guidance, we must also evaluate our collaborative agreements for
proper income statement classification based on the nature of
the underlying activity. Amounts due from our collaborative
partners related to development activities are generally
reflected as a reduction of research and development expense
because the performance of contract development services is not
central to our operations. For collaborations with
commercialized products, if we are the principal (as defined in
reporting revenue as a principal versus net as an agent as
required by the Revenue Recognition Topic of the
Codification) we record revenue and the corresponding operating
costs in their respective line items within our consolidated
statements of income. If we are not the principal, we record
operating costs as a reduction of revenue. The guidance
describes the principal as the party who is responsible for
delivering the product or service to the customer, has latitude
to determine price, and has the risks and rewards of providing
product or service to the customer, including inventory and
credit risk. The adoption of this newly issued accounting
standard did not impact our financial position or results of
operations; however it resulted in enhanced disclosures for our
collaboration activities.
Genentech
We collaborate with Genentech, Inc., or Genentech, a member of
the Roche Group, on the development and commercialization of
RITUXAN. We also have rights to collaborate with Genentech on
the development and commercialization of (1) anti-CD20
products that Genentech acquires or develops, which we refer to
as New Anti-CD20 Products, and (2) anti-CD20 products that
Genentech licenses from a third party, which we refer to as
Third Party Anti-CD20 Products. Currently, there is only one New
Anti-CD20 Product, ocrelizumab, and only one Third Party
Anti-CD20 Product, GA101. Our collaboration rights for New
Anti-CD20 Products are limited to the United States and our
collaboration rights for Third Party Anti-CD20 Products are
dependent upon Genentech’s underlying license rights. A
joint development committee, or JDC, composed of three members
from each company must unanimously approve a development plan
for each specific indication of certain pharmaceutical products,
and Genentech has responsibility for implementation of JDC
approved development plans in accordance with the provisions of
our collaboration agreement. In the event that we undergo a
change in control, as defined in the collaboration agreement,
Genentech has the right to present an offer to buy the rights to
RITUXAN, and we must either accept Genentech’s offer or
purchase Genentech’s rights to RITUXAN on the same terms as
its offer. If Genentech presents such an offer, then they will
be deemed concurrently to have exercised a right, in exchange
for a royalty on net sales in the United States of any
anti-CD20 product acquired or developed by Genentech or any
anti-CD20 product that Genentech licenses from a third party
that is developed under the agreement, to purchase our interest
in each such product. Our collaboration with Genentech was
created through a contractual arrangement and not through a
joint venture or other legal entity.
While Genentech is responsible for the worldwide manufacturing
of RITUXAN, development and commercialization rights and
responsibilities under this collaboration are divided as follows:
United
States
We share with Genentech co-exclusive rights to develop,
commercialize and market RITUXAN and New Anti-CD20 Products in
the United States. Although we contribute to the marketing and
continued development of RITUXAN, we have a limited sales force
dedicated to RITUXAN and limited development activity. Genentech
is primarily responsible for the commercialization of RITUXAN in
the United States. Its responsibilities include selling and
marketing, customer service, order entry, distribution, shipping
and billing, and other administrative support. Genentech also
incurs the majority of continuing development costs for RITUXAN.
Canada
We and Genentech have assigned our rights to develop,
commercialize and market RITUXAN, in Canada to F.
Hoffmann-La Roche Ltd., or Roche.
Outside
the United States and Canada
We have granted Genentech exclusive rights to develop,
commercialize and market RITUXAN outside the United States and
Canada. Under the terms of separate sublicense agreements
between Genentech and Roche, development and commercialization
of RITUXAN outside the United States and Canada is the
responsibility of Roche, except in Japan where RITUXAN is
co-marketed by Zenyaku Kogyo Co. Ltd., or Zenyaku, and Chugai
Pharmaceutical Co. Ltd, or Chugai, an affiliate of Roche. We do
not have any direct contractual arrangements with Roche, Zenyaku
or Chugai for such development or commercialization.
Revenues from unconsolidated joint business consists of
(1) our share of pretax co-promotion profits in the United
States (2) reimbursement of selling and development
expenses in the United States; and (3) revenue on sales of
RITUXAN outside the United States, which consist of our share of
pretax co-promotion profits in Canada and royalty revenue on
sales of RITUXAN outside the United States and Canada by Roche,
Zenyaku and Chugai. Pre-tax co-promotion profits are calculated
and paid to us by Genentech in the United States and by Roche in
Canada. Pre-tax co-promotion profits consist of United States
and Canadian sales of RITUXAN to third-party customers net of
discounts and allowances less the cost to manufacture RITUXAN,
third-party royalty expenses, distribution, selling, and
marketing expenses, and joint development expenses incurred by
Genentech, Roche and us. We record our royalty and co-promotion
profits revenue on sales of RITUXAN outside the United States on
a cash basis.
Revenues from unconsolidated joint business consist of the
following:
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For the Three
|
|
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For the Nine
|
|
|
|
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Months Ended
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Months Ended
|
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|
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September 30,
|
|
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September 30,
|
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(In millions)
|
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2009
|
|
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2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Biogen Idec Inc.’s share of co-promotion profits in the
United States
|
|
$
|
203.3
|
|
|
$
|
192.2
|
|
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$
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581.3
|
|
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$
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527.9
|
|
|
Reimbursement of selling and development expenses in the United
States
|
|
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15.8
|
|
|
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16.8
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|
|
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47.5
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|
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45.4
|
|
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Revenue on sales of RITUXAN outside the United States
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64.8
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90.0
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209.5
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251.7
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|
|
|
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|
|
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|
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Total unconsolidated joint business
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$
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283.9
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$
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299.0
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$
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838.3
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$
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825.0
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Under the collaboration agreement, our current pretax
co-promotion profit-sharing formula, which resets annually, is
stated within the table below. In 2009 and 2008, the 40%
threshold was met during the first quarter.
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Biogen Idec
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Inc.’s Share of
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Co-promotion
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Co-promotion Operating Profits
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Profits
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First $50 million
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30
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%
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Greater than $50 million
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40
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%
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Our agreement with Genentech provides that the successful
development and commercialization of the first New Anti-CD20
Product will decrease our percentage of co-promotion profits of
the collaboration. Specifically, for each calendar year or
portion thereof following the approval date of the first New
Anti-CD20 Product, the pretax co-promotion profit-sharing
formula for RITUXAN and New Anti-CD20 Products sold by us and
Genentech will change as follows:
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Biogen Idec
|
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Inc.’s Share of
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First New Anti-CD20 Product U.S.
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Co-promotion
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Co-promotion Operating Profits
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Gross Product Sales
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Profits
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First $50 million(1)
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Not Applicable
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30
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%
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Greater than $50 million
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Until such sales exceed $150 million
in any calendar year(2)
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38
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%
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Or
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After such sales exceed $150 million in
any calendar year until such sales
exceed $350 million in any calendar year(3)
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35
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%
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Or
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After such sales exceed $350 million in
any calendar year(4)
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30
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%
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(1) |
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not applicable in the calendar year the first New Anti-CD20
Product is approved if $50 million in
co-promotion
operating profits has already been achieved in such calendar
year through sales of RITUXAN. |
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(2) |
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if we are recording our share of RITUXAN co-promotion profits at
40%, upon the approval date of the first New Anti-CD20 Product,
our share of co-promotion profits for RITUXAN and the New
Anti-CD20 Product will be immediately reduced to 38% following
the approval date of the first New Anti-CD20 Product until the
$150 million in first New Anti-CD20 Product sales level is
achieved. |
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(3) |
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if $150 million in first New Anti-CD20 Product sales is
achieved in the same calendar year the first New Anti-CD20
Product receives approval, then the 35% co-promotion
profit-sharing rate will not be effective until January 1 of the
following calendar year. Once the $150 million in first New
Anti-CD20 Product sales level is achieved then our share of
co-promotion profits for the balance of the year and all
subsequent years (after the first $50 million in
co-promotion operating profits in such years) will be 35% until
the $350 million in first New Anti-CD20 Product sales level
is achieved. |
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(4) |
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if $350 million in first New Anti-CD20 Product sales is
achieved in the same calendar year that $150 million in new
product sales is achieved, then the 30% co-promotion
profit-sharing rate will not be effective until January 1 of the
following calendar year (or January 1 of the second following
calendar year if the first New Anti-CD20 Product receives
approval and, in the same calendar year, the $150 million
and $350 million in first New Anti-CD20 Product sales
levels are achieved). Once the $350 million in first New
Anti-CD20 Product sales level is achieved then our share of
co-promotion profits for the balance of the year and all
subsequent years will be 30%. |
We will participate in Third Party Anti-CD20 Products on similar
financial terms as for ocrelizumab.
Currently, we record our share of the expenses incurred by the
collaboration for the development of New Anti-CD20 Products in
research and development expense in our consolidated statements
of income. After a New Anti-CD20 Product is approved, we will
record our share of the development expenses related to that
product as a reduction of our share of pretax co-promotion
profits in revenues from unconsolidated joint business. We
incurred $14.7 million and $47.3 million in
development expense related to New Anti-CD20 products for the
three and nine months ended September 30, 2009,
respectively, as compared to $9.0 million and
$31.6 million, respectively, during the prior year
comparative periods. Reimbursement to Genentech for our share of
these costs occurs through the net amount of co-promotion
profits in the United States remitted to us.
Elan
We have a collaboration agreement with Elan to collaborate in
the development, manufacture and commercialization of TYSABRI.
Under the terms of the agreement, we manufacture TYSABRI and
collaborate with Elan on the product’s marketing,
commercial distribution and on-going development activities. The
collaboration with Elan is designed to effect an equal sharing
of profits and losses generated by the activities of the
collaboration between Elan and us. Under the agreement, however,
once sales of TYSABRI exceeded specific thresholds, Elan was
required to make milestone payments to us in order to continue
sharing equally in the collaboration’s results. As of
September 30, 2009, Elan has paid to us milestone payments
of $75.0 million in the third quarter of 2008 and
$50.0 million in the first quarter of 2009. We have
recorded these amounts as deferred revenue upon receipt and are
recognizing the entire $125.0 million as product revenue in
our consolidated statements of income over the term of the
collaboration agreement based on a units of revenue method
whereby the revenue recognized is based on the ratio of units
shipped in the current period over the total units expected to
be shipped over the remaining term of the collaboration. No
additional milestone payments are required under the agreement
to maintain the current profit sharing split. Our collaboration
agreement with Elan provides Elan or us with the option to buy
the rights to TYSABRI in the event that the other company was to
undergo a change of control (as defined in the collaboration
agreement).
In the United States, we sell TYSABRI to Elan who sells the
product to third party distributors. Our sales price to Elan in
the United States is set prior to the beginning of each
quarterly period to effect an approximate equal sharing of the
gross margin between Elan and us. We recognize revenue for sales
in the United States of TYSABRI upon Elan’s shipment of the
product to the third party distributors. We incur manufacturing
and distribution costs, research and development expenses,
commercial expenses, and general and administrative expenses. We
record these expenses to their respective line items within our
consolidated statements of income when they are incurred.
Research and development and sales and marketing expenses are
shared equally with Elan and the reimbursement of these expenses
is recorded as reductions of the respective expense categories.
During the three and nine months ended September 30, 2009,
we recorded $5.2 million and $16.6 million,
respectively, as reductions of research and development expense
for reimbursements from Elan as compared to $4.0 million
and $17.8 million, respectively, of research and
development expense recorded for reimbursement from Elan during
the prior year comparative periods. In addition, for the three
and nine months ended September 30, 2009, we recorded
$14.7 million and $46.9 million, respectively, as
reductions of selling, general and administrative expense for
reimbursements from Elan as compared to $9.3 million and
$26.8 million, respectively, in the prior year comparative
periods.
Outside the United States, or rest of world, we are responsible
for distributing TYSABRI to customers and are primarily
responsible for all operating activities. Generally, we
recognize revenue for sales of TYSABRI in the rest of world at
the time of product delivery to our customers. Payments are made
to Elan for their share of the rest of world net operating
profits to effect an equal sharing of collaboration operating
profit. These payments also include the reimbursement for our
portion of third-party royalties that Elan pays
on behalf of the collaboration relating to rest of world sales.
These amounts are reflected in the collaboration profit sharing
line in our consolidated statements of income. For the three and
nine months ended September 30, 2009, $60.7 million
and $152.6 million, respectively, was reflected in the
collaboration profit sharing line for our collaboration with
Elan, as compared to $43.5 million and $98.4 million,
respectively, for the prior year comparative periods. As rest of
world sales of TYSABRI increase, our collaboration profit
sharing expense is expected to increase.
Acorda
On June 30, 2009, we entered into a collaboration and
license agreement with Acorda to develop and commercialize
products containing Fampridine-SR in markets outside the United
States. Fampridine-SR is an oral sustained-release compound,
which is being developed to improve walking ability in people
with MS. The transaction represents a sublicensing of an
existing license agreement between Acorda and Elan. The parties
have also entered into a related supply agreement. The
$110.0 million upfront payment made on July 1, 2009
was recorded as research and development expense during the
second quarter 2009 as the product candidate has not received
regulatory approval.
Under the terms of the agreement, we will commercialize
Fampridine-SR and any aminopyridine products developed in our
territory and will also have responsibility for regulatory
activities and future clinical development of Fampridine-SR in
those markets. We may incur additional milestone payments of up
to $400.0 million based upon the successful achievement of
regulatory and commercial sales milestones. We will also make
tiered royalty payments to Acorda on sales outside of the United
States. The consideration that we pay for products will reflect
all amounts due from Acorda to Elan for sales in markets outside
the United States, including royalties owed. We can also carry
out future joint development activities under a cost-sharing
arrangement.
Elan will continue to manufacture commercial supply of
Fampridine-SR, based upon its existing supply agreement with
Acorda. Under the existing agreements with Elan, Acorda will pay
Elan 7% of the upfront and milestone payments that Acorda
receives from us.
A summary of activity related to this collaboration for the
three and nine months ended September 30, 2009 and 2008,
respectively, is as follows:
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|
|
|
|
|
|
|
|
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For the Three Months Ended September 30,
|
|
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For the Nine Months Ended September 30,
|
|
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(In millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Upfront payments made to Acorda
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110.0
|
|
|
$
|
—
|
|
|
Total expense incurred by Biogen Idec Inc., excluding upfront
and milestone payments
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
Total expense reflected within our consolidated statements of
income
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
110.5
|
|
|
$
|
—
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
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|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Acorda
|
|
$
|
110.0
|
|
|
Total expense incurred by Biogen Idec Inc., excluding upfront
and milestone payments
|
|
$
|
0.5
|
|
|
Estimate of additional expense to be incurred by us in
development of
Fampridine-SR
|
|
$
|
10.0
|
|
Neurimmune
We have a collaboration agreement with Neurimmune SubOne AG, or
Neurimmune, a subsidiary of Neurimmune Therapeutics AG, for the
development and commercialization of antibodies for the
treatment of Alzheimer’s disease. Neurimmune will conduct
research to identify potential therapeutic antibodies and we
will be responsible for the development, manufacturing and
commercialization of all products. We may pay Neurimmune up to
$360.0 million in remaining milestone payments, as well as
royalties on sales of any resulting commercial products.
Milestone payments are reflected within our consolidated
statements of income when achieved. The royalty term for sales
in each country will be no less than 12 years from the
first commercial sale of product using such compound in such
country.
We have determined that we are the primary beneficiary of
Neurimmune in accordance with the guidance provided by the
Consolidation Topic of the Codification. As such, we
consolidate the results of Neurimmune. The assets and
liabilities of Neurimmune are not significant as it is a
research and development organization. We reimburse Neurimmune
for all research and development costs incurred in support of
the collaboration. These amounts are also reflected in research
and development expense in our statements of income. A summary
of activity related to this collaboration for the three and nine
months ended September 30, 2009 and 2008, respectively, is
as follows:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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For the Three
|
|
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For the Nine
|
|
|
|
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Months Ended
|
|
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Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Total upfront and milestone payments made to Neurimmune
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
$
|
7.5
|
|
|
$
|
10.5
|
|
|
Total expense incurred by Neurimmune in support of the
collaboration
|
|
$
|
1.9
|
|
|
$
|
1.3
|
|
|
$
|
5.5
|
|
|
$
|
4.5
|
|
|
Total expense reflected within our consolidated statements of
income
|
|
$
|
1.9
|
|
|
$
|
3.8
|
|
|
$
|
13.0
|
|
|
$
|
15.0
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
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|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Neurimumune
|
|
$
|
20.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
12.0
|
|
|
Estimate of additional expense to be incurred by us in
development of the lead compound
|
|
$
|
440.0
|
|
Cardiokine
We have a collaboration agreement with Cardiokine Biopharma LLC,
or Cardiokine, a subsidiary of Cardiokine Inc., for the joint
development of Lixivaptan, an oral compound for the potential
treatment of hyponatremia in patients with congestive heart
failure. The royalty term under the agreement for sales in each
country will be no less than 10 years from the first
commercial sale of a Lixivaptan product in such country. If
successful, we will be responsible for certain development
activities, manufacturing and global commercialization of
Lixivaptan, and Cardiokine has an option for limited
co-promotion in the United States. Under the terms of the
agreement, we may pay up to $150.0 million in remaining
development milestone payments as well as royalties on
commercial sales.
We have determined that we are the primary beneficiary of
Cardiokine in accordance with the guidance provided by the
Consolidation Topic of the Codification. As such, we
consolidate the results of Cardiokine. The assets and
liabilities of Cardiokine are not significant as it is a
research and development organization. We reimburse Cardiokine
for 90% of research and development costs incurred in support of
the collaboration. A summary of activity related to this
collaboration for the three and nine months ended
September 30, 2009 and 2008, respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total upfront and milestone payments made to Cardiokine
|
|
$
|
20.0
|
|
|
|
—
|
|
|
$
|
20.0
|
|
|
|
—
|
|
|
Total expense incurred by the collaboration
|
|
$
|
17.2
|
|
|
$
|
15.3
|
|
|
$
|
48.5
|
|
|
$
|
38.9
|
|
|
Biogen Idec Inc.’s share of expense reflected within our
consolidated statements of income
|
|
$
|
35.5
|
|
|
$
|
13.8
|
|
|
$
|
63.7
|
|
|
$
|
35.0
|
|
|
Collaboration expense allocated to noncontrolling interests, net
of tax
|
|
$
|
1.7
|
|
|
$
|
1.5
|
|
|
$
|
4.8
|
|
|
$
|
3.9
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Cardiokine
|
|
$
|
70.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
106.8
|
|
|
Estimate of additional expense to be incurred by us in
development of the Lixivaptan (all indications)
|
|
$
|
430.0
|
|
Biovitrum
We have a collaboration agreement with Biovitrum AB, or
Biovitrum, to jointly develop and commercialize Factor VIII and
Factor IX for the treatment of hemophilia. Under the agreement,
development costs are shared equally. We have commercial rights
to North America and Biovitrum has commercial rights to Europe.
Each party shares in the other’s net sales based on a
royalty percentage of up to 33.3%. All other territories are to
be managed by a third party with us and Biovitrum sharing
equally in all royalties, license fees and other revenues
arising from arrangements with third party licenses and
distributors.
Amounts incurred by us in the development of the Factor XIII and
Factor IX are reflected as research and development expense in
our consolidated statements of income, reduced by amounts due
from Biovitrum. A
summary of collective activity related to the Factor VIII and
Factor IX programs for the three and nine months ended
September 30, 2009 and 2008, respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total expense incurred by the collaboration
|
|
$
|
6.8
|
|
|
$
|
8.4
|
|
|
$
|
33.2
|
|
|
$
|
26.9
|
|
|
Biogen Idec Inc.’s share of expense reflected within our
consolidated statements of income
|
|
$
|
3.4
|
|
|
$
|
4.2
|
|
|
$
|
16.6
|
|
|
$
|
13.5
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments received from Biovitrum
|
|
$
|
4.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
44.8
|
|
|
Estimate of additional expense to be incurred by the
collaboration in development of Factors XIII and IX
|
|
$
|
95.0
|
|
Under the agreement, Biovitrum may pay us an additional
$19.0 million in milestone payments.
Mondo
We have an agreement with MondoGen, or Mondo, a subsidiary of
MondoBiotech AG, to develop and commercialize Aviptadil, a
clinical compound for the treatment of pulmonary arterial
hypertension, or PAH. Under the agreement, we are responsible
for manufacturing, development, and commercialization of the
compound and could incur up to $30.0 million in milestone
payments for successful development and commercialization of the
program in the United States and Europe, as well as royalty
payments on commercial sales. In February 2009, the parties
revised the agreement to clarify that our development funding
obligation should not exceed $13.3 million, inclusive of
all amounts incurred during 2009 and the three months ended
December 31, 2008, if we decide not to pursue the
collaboration beyond 2009.
We have determined that we are the primary beneficiary of Mondo,
and as such, we consolidate the results of Mondo. The assets and
liabilities of Mondo are not significant as it is a research and
development organization. Expenses incurred by the collaboration
are reflected in research and development expense in our
consolidated statements of income.
A summary of activity related to this collaboration for the
three and nine months ended September 30, 2009 and 2008,
respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total expense incurred by the collaboration
|
|
$
|
4.0
|
|
|
$
|
2.7
|
|
|
$
|
10.9
|
|
|
$
|
11.7
|
|
|
Total expense reflected within our consolidated statements of
income
|
|
$
|
4.0
|
|
|
$
|
2.7
|
|
|
$
|
10.9
|
|
|
$
|
11.7
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Mondo
|
|
$
|
7.5
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
40.8
|
|
UCB
In June 2009, UCB, S.A., or UCB, and we announced the
discontinuation of the Phase 2 clinical trial for this
collaboration’s only product candidate due to the absence
of clinically relevant efficacy. Since the inception of our
collaboration agreement with UCB, we have incurred a total of
$98.0 million in research and development expenses for the
development and commercialization of an oral alpha4 integrin, or
VLA-4, antagonist for the treatment of relapsing remitting MS.
A summary of activity related to this collaboration for the
three and nine months ended September 30, 2009 and 2008,
respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total expense incurred by the collaboration
|
|
$
|
5.3
|
|
|
$
|
7.2
|
|
|
$
|
27.7
|
|
|
$
|
23.7
|
|
|
Biogen Idec Inc.’s share of expense reflected within our
consolidated statements of income
|
|
$
|
3.7
|
|
|
$
|
5.0
|
|
|
$
|
18.0
|
|
|
$
|
15.3
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to UCB
|
|
$
|
30.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
68.0
|
|
|
Estimate of additional expense to be incurred by us in
development of the compound in this indication
|
|
$
|
4.5
|
|
Facet
Biotech
We have a collaboration agreement with Facet aimed at advancing
the development and commercialization of daclizumab in MS and
volociximab in solid tumors. Daclizumab is a humanized
monoclonal antibody that binds to the IL-2 receptor on activated
T cells. Volociximab is an anti-angiogenic chimeric antibody
directed against alpha5 beta1 integrin, or VLA5. Under the
agreement, development, and commercialization costs and profits
are shared equally. We may incur up to an additional
$650.0 million of payments upon achievement of development
and commercial milestones.
A summary of activity related to this collaboration for the
three and nine months ended September 30, 2009 and 2008,
respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total expense incurred by the collaboration
|
|
$
|
10.6
|
|
|
$
|
13.3
|
|
|
$
|
28.3
|
|
|
$
|
52.9
|
|
|
Biogen Idec Inc.’s share of expense reflected within our
consolidated statements of income
|
|
$
|
5.3
|
|
|
$
|
6.7
|
|
|
$
|
14.2
|
|
|
$
|
26.4
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Facet
|
|
$
|
50.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
115.1
|
|
|
Estimate of additional expense to be incurred by us in
development of current indications of daclizumab and volociximab
|
|
$
|
500.0
|
|
On September 21, 2009, we commenced a tender offer to
acquire all of the outstanding shares of Facet for approximately
$356.0 million or $14.50 per share in cash. On
October 16, 2009, we extended the offer to
December 16, 2009 at the same offering price of $14.50 per
share. Our all-cash proposal is not subject to any financing
contingency or approval by Biogen Idec shareholders. We may
incur additional costs to complete this transaction in the event
that this tender offer is successfully completed. We do not
expect these additional transaction costs to be material to our
financial position or results of operations.
Vernalis
We have a collaboration agreement with Vernalis plc, or
Vernalis, aimed at advancing the development and
commercialization of an adenosine A2a receptor antagonist for
treatment of Parkinson’s disease. Under the agreement, we
received exclusive worldwide rights to develop and commercialize
the compound. We are responsible for funding all development
costs and may incur up to an additional $85.0 million of
milestone payments upon achievement of certain objectives, as
well as royalties on commercial sales.
A summary of activity related to this collaboration for the
three and nine months ended September 30, 2009 and 2008,
respectively, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Total expense incurred by the collaboration and reflected within
our consolidated statements of income
|
|
$
|
3.3
|
|
|
$
|
4.4
|
|
|
$
|
10.4
|
|
|
$
|
13.2
|
|
A summary of activity related to this collaboration since
inception, along with an estimate of additional future
development expense expected to be incurred by us, is as follows:
| |
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(In millions)
|
|
2009
|
|
|
|
Total upfront and milestone payments made to Vernalis
|
|
$
|
13.0
|
|
|
Total development expense incurred by Biogen Idec Inc.,
excluding upfront and milestone payments
|
|
$
|
65.3
|
|
|
Estimate of additional expense to be incurred by us in
development of the compound in this indication
|
|
$
|
230.0
|
|
|
| 3 |
BRISTOL MYERS SQUIBB CO |
Note 2. Alliances and
Collaborations
sanofi
The Company has agreements
with sanofi-aventis (sanofi) for the codevelopment and
cocommercialization of AVAPRO*/AVALIDE*
(irbesartan/irbesartan-hydrochlorothiazide), an angiotensin II
receptor antagonist indicated for the treatment of hypertension and
diabetic nephropathy, and PLAVIX* (clopidogrel bisulfate), a
platelet aggregation inhibitor. The worldwide alliance operates
under the framework of two geographic territories; one in the
Americas (principally the U.S., Canada, Puerto Rico and Latin
American countries) and Australia and the other in Europe and Asia.
Accordingly, two territory partnerships were formed to manage
central expenses, such as marketing, research and development and
royalties, and to supply finished product to the individual
countries. In general, at the country level, agreements either to
copromote (whereby a partnership was formed between the parties to
sell each brand) or to comarket (whereby the parties operate and
sell their brands independently of each other) are in place. The
agreements expire on the later of (i) with respect to PLAVIX*,
2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas
and Australia and 2013 in Europe and Asia and (ii) the
expiration of all patents and other exclusivity rights in the
applicable territory. The Company acts as the operating partner for
the territory covering the Americas and Australia and owns a 50.1%
majority controlling interest in this territory. Sanofi’s
ownership interest in this territory is 49.9%. As such, the Company
consolidates all country partnership results for this territory and
records sanofi’s share of the results as a noncontrolling
interest which was $443 million ($300 million after-tax) and $375
million ($250 million after-tax) for the three months ended
September 30, 2009 and 2008, respectively, and $1,258 million
($849 million after-tax) and $1,063 million ($714 million
after-tax) for the nine months ended September 30, 2009 and
2008, respectively. The Company recorded net sales in this
territory and in comarketing countries outside this territory
(Germany, Italy, Spain and Greece) of $1,883 million and $1,773
million for the three months ended September 30, 2009 and
2008, respectively, and $5,472 million and $5,108 million for the
nine months ended September 30, 2009 and 2008, respectively.
Discovery royalties owed to sanofi were included in cost of
products sold and amounted to $305 million and $273 million during
the three months ended September 30, 2009 and 2008,
respectively, and $881 and $778 million during the nine months
ended September 30, 2009 and 2008, respectively.
Cash flows from operating
activities of the partnerships in the territory covering the
Americas and Australia are recorded as operating activities within
the Company’s consolidated statements of cash flows.
Distributions of partnership profits to sanofi and sanofi’s
funding of ongoing partnership operations occur on a routine basis
and are also recorded within operating activities on the
Company’s consolidated statements of cash flows.
Sanofi acts as the
operating partner for the territory covering Europe and Asia and
owns a 50.1% majority financial controlling interest within this
territory. The Company’s ownership interest in the
partnership within this territory is 49.9%. The Company accounts
for the investment in partnership entities in this territory under
the equity method and records its share of the results in equity in
net income of affiliates in the consolidated statements of
earnings. The Company’s share of income from these
partnership entities before taxes was $141 million and $163 million
for the three months ended September 30, 2009 and 2008,
respectively, and $442 million and $487 million for the nine months
ended September 30, 2009 and 2008, respectively.
The Company routinely
receives distributions of profits and provides funding for the
ongoing operations of the partnerships in the territory covering
Europe and Asia. These transactions are recorded as operating
activities within the Company’s consolidated statements of
cash flows.
The Company and sanofi have
a separate partnership governing the copromotion of irbesartan in
the U.S. Under this alliance, the Company recognized other income
of $8 million in each of the three month periods ended
September 30, 2009 and 2008, and $24 million in each of the
nine month periods ended September 30, 2009 and 2008, related
to the amortization of deferred income associated with
sanofi’s $350 million payment to the Company for their
acquisition of an interest in the irbesartan license for the U.S.
upon formation of the alliance. The unrecognized portion of the
deferred income amounted to $99 million and $123 million at
September 30, 2009 and December 31, 2008, respectively,
and will continue to amortize through 2012, the expected expiration
of the license.
The income attributed to
certain packaging activities and development royalties with sanofi
are reflected net in other income and were $20 million and $26
million during the three months ended September 30, 2009 and
2008, respectively, and $43 million and $76 million during the nine
months ended September 30, 2009 and 2008,
respectively.
The following is the
summarized financial information for the Company’s equity
interests in the partnerships with sanofi for the territory
covering Europe and Asia:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| Dollars in Millions |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Net sales
|
|
$ |
732 |
|
$ |
881 |
|
$ |
2,259 |
|
$ |
2,704 |
|
Gross profit
|
|
|
541 |
|
|
657 |
|
|
1,685 |
|
|
2,048 |
|
Net income
|
|
|
279 |
|
|
318 |
|
|
863 |
|
|
978 |
Otsuka
The Company has a worldwide
commercialization agreement with Otsuka Pharmaceutical Co., Ltd.
(Otsuka), to codevelop and copromote with Otsuka, ABILIFY*
(aripiprazole), for the treatment of schizophrenia, bipolar mania
disorder and major depressive disorder, except in Japan, China,
Taiwan, North Korea, South Korea, the Philippines, Thailand,
Indonesia, Pakistan and Egypt. Under the terms of the agreement,
the Company purchases the product from Otsuka and performs finish
manufacturing for sale by the Company or Otsuka to third-party
customers. The product is currently copromoted with Otsuka in the
U.S., United Kingdom (UK), Germany, France and Spain. Currently in
the U.S., Germany, France and Spain, where the product is invoiced
to third-party customers by the Company on behalf of Otsuka, the
Company records alliance revenue for its 65% contractual share of
third-party net sales and records all expenses related to the
product. The Company recognizes this alliance revenue when ABILIFY*
is shipped and all risks and rewards of ownership have transferred
to third-party customers. In the UK and Italy, where the Company is
presently the exclusive distributor for the product, the Company
records 100% of the net sales and related cost of products sold and
expenses. The Company also has an exclusive right to sell ABILIFY*
in other countries in Europe, the Americas and a number of
countries in Asia. In these countries, the Company records 100% of
the net sales and related cost of products sold.
In April 2009, the Company
and Otsuka announced an agreement to extend the U.S. portion of the
commercialization and manufacturing agreement until the expected
loss of product exclusivity in April 2015. Under the terms of the
agreement, the Company paid Otsuka $400 million, which will be
amortized as a reduction of net sales through the extension period.
Beginning on January 1, 2010, the share of ABILIFY* U.S. net
sales that the Company records will change from 65% to the
following:
|
|
|
| |
|
Share as a % of U.S. Net
Sales |
|
2010
|
|
58.0% |
|
2011
|
|
53.5% |
|
2012
|
|
51.5% |
During this period, Otsuka
will be responsible for 30% of the expenses related to the
commercialization of ABILIFY*.
Beginning January 1,
2013, and through the expected loss of U.S. exclusivity in 2015,
the Company will receive the following percentages of U.S. annual
net sales:
|
|
|
| |
|
Share as a % of U.S. Net
Sales |
|
$0 to $2.7
billion
|
|
50% |
|
$2.7 billion to $3.2
billion
|
|
20% |
|
$3.2 billion to $3.7
billion
|
|
7% |
|
$3.7 billion to $4.0
billion
|
|
2% |
|
$4.0 billion to $4.2
billion
|
|
1% |
|
In excess of $4.2
billion
|
|
20% |
During this period, Otsuka
will be responsible for 50% of all expenses related to the
commercialization of ABILIFY*.
In addition, the Company
and Otsuka announced that they have entered into an oncology
collaboration for SPRYCEL (dasatinab) and IXEMPRA (ixabepilone),
which includes the U.S., Japan and European Union (EU) markets (the
Oncology Territory). Beginning in 2010 through 2020, the
collaboration fees the Company will pay to Otsuka annually are the
following percentages of net sales of SPRYCEL and IXEMPRA in the
Oncology Territory:
|
|
|
|
|
| |
|
% of Net Sales |
| |
|
2010 - 2012 |
|
2013 - 2020 |
|
$0 to $400
million
|
|
30% |
|
65% |
|
$400 million to $600
million
|
|
5% |
|
12% |
|
$600 million to $800
million
|
|
3% |
|
3% |
|
$800 million to $1.0
billion
|
|
2% |
|
2% |
|
In excess of $1.0
billion
|
|
1% |
|
1% |
During these periods,
Otsuka will contribute (i) 20% of the first $175 million of
certain commercial operational expenses relating to the oncology
products, and (ii) 1% of such commercial operational expenses
relating to the products in the territory in excess of $175
million. Starting in 2011, Otsuka will have the right to co-promote
SPRYCEL with the Company in the U.S. and Japan and in 2012, in the
top five EU markets.
The U.S. extension and the
oncology collaboration include a change-of-control provision in the
case of an acquisition of the Company. If the acquiring company
does not have a competing product to ABILIFY*, then the new company
will assume the ABILIFY* agreement (as amended) and the oncology
collaboration as it exists today. If the acquiring company has a
product that competes with ABILIFY*, Otsuka can elect to request
the acquiring company to choose whether to divest ABILIFY* or the
competing product. In the scenario where ABILIFY* is divested,
Otsuka would be obligated to acquire the Company’s rights
under the ABILIFY* agreement (as amended). The agreements also
provide that in the event of a generic competitor to ABILIFY* after
January 1, 2010, the Company has the option of terminating the
ABILIFY* April 2009 amendment (with the agreement as previously
amended remaining in force). If the Company were to exercise such
option then either (i) the Company would receive a payment
from Otsuka according to a pre-determined schedule and the oncology
collaboration would terminate at the same time or (ii) the
oncology collaboration would continue for a truncated period
according to a pre-determined schedule.
For the entire EU, the
agreement remained unchanged and will expire in June 2014. In other
countries where the Company has the exclusive right to sell
ABILIFY*, the agreement expires on the later of the 10th
anniversary of the first commercial sale in such country or
expiration of the applicable patent in such country.
The Company recorded total
revenue for ABILIFY* of $653 million and $564 million for the three
months ended September 30, 2009 and 2008, respectively, and
$1,885 million and $1,547 million for the nine months ended
September 30, 2009 and 2008, respectively. The Company
amortized into cost of products sold $1 million for the each of the
three months periods ended September 30, 2009 and 2008 and $5
million for the each of the nine months periods ended
September 30, 2009 and 2008 for previously capitalized
milestone payments. The unamortized capitalized payment balance is
recorded in other intangible assets, net and was $18 million at
September 30, 2009 and $23 million at December 31, 2008,
and will continue to amortize through 2012. The Company amortized
as a reduction of net sales $17 million and $33 million for the
three and nine month periods ended September 30, 2009, related
to the $400 million extension payment. The unamortized portion of
this payment amounted to $367 million at September 30, 2009,
and is included in other assets, net.
Lilly
The Company has a
commercialization agreement with Eli Lilly and Company (Lilly)
through Lilly’s November 2008 acquisition of ImClone Systems
Incorporated (ImClone) for the codevelopment and copromotion of
ERBITUX* (cetuximab) in the U.S., which expires as to ERBITUX* in
September of 2018. The Company also has codevelopment and
copromotion rights in Canada and Japan. ERBITUX* is indicated for
use in the treatment of patients with metastatic colorectal cancer
and for use in the treatment of squamous cell carcinoma of the head
and neck. Under the agreement covering North America, Lilly
receives a distribution fee based on a flat rate of 39% of net
sales in North America.
In October 2007, the
Company and ImClone amended their codevelopment agreement with
Merck KGaA to provide for cocommercialization of ERBITUX* in Japan,
which expires in 2032. Lilly has the ability to terminate the
agreement after 2018 if it determines that it is commercially
unreasonable for Lilly to continue. ERBITUX* received marketing
approval in Japan in July 2008 for the use of ERBITUX* in treating
patients with advanced or recurrent colorectal cancer. Merck
recorded sales of ERBITUX* in Japan and the Company receives 50% of
the pre-tax profit which is further shared equally with Lilly. The
Company records its share of profits from commercialization in
Japan in other income which was $8 million and $18 million for the
three and nine months ended September 30, 2009.
The Company recorded net
sales for ERBITUX* of $179 million and $184 million for the three
months ended September 30, 2009 and 2008, respectively, and
$516 million and $567 million for the nine months ended
September 30, 2009 and 2008, respectively. The Company
amortized into cost of products sold $9 million in each of the
three month periods ended September 30, 2009 and 2008,
respectively, and $28 million in each of the nine month periods
ended September 30, 2009 and 2008, for previously capitalized
milestone payments, which were accounted for as a license
acquisition. The unamortized portion of the approval payments is
recorded in other intangible assets, net and was $332 million at
September 30, 2009 and $360 million at December 31, 2008,
and will continue to amortize through 2018, the remaining term of
the agreement.
Upon initial execution of
the commercialization agreement, the Company acquired an ownership
interest in ImClone which approximated 17% at the time of the
transaction noted below, and had been accounting for its investment
under the equity method. The Company recorded equity income of $2
million and an equity loss of $3 million in net income of
affiliates for the three and nine months ended September 30,
2008, respectively, which was adjusted for revenue recognized by
ImClone for pre-approved milestone payments made by the Company
prior to 2004. The Company sold its shares of ImClone for $1.0
billion and recognized a pre-tax gain of $895 million in November
2008.
Gilead
The Company and Gilead
Sciences, Inc. (Gilead) have a joint venture to develop and
commercialize ATRIPLA* (efavirenz 600 mg/ emtricitabine 200 mg/
tenofovir disoproxil fumarate 300 mg), a once-daily single tablet
three-drug regimen combining the Company’s SUSTIVA
(efavirenz) and Gilead’s TRUVADA* (emtricitabine and
tenofovir disoproxil fumarate), in the U.S., Canada and
Europe.
Gilead records all ATRIPLA*
revenues in the U.S., Canada and most countries in Europe and
consolidates the results of the joint venture in its operating
results. The Company records revenue for the bulk efavirenz
component of ATRIPLA* upon sales of that product to third-party
customers. In a limited number of EU countries, the Company records
revenue for ATRIPLA* where the Company agreed to purchase the
product from Gilead and distribute it to third-party customers. The
Company recorded revenues of $218 million and $155 million for the
three months ended September 30, 2009 and 2008, respectively,
and $606 million and $405 million for the nine months ended
September 30, 2009 and 2008, respectively, related to ATRIPLA*
sales. The Company accounts for its participation in the U.S. joint
venture under the equity method of accounting and records its share
of the joint venture results in equity in net income of affiliates
in the consolidated statements of earnings. The Company recorded an
equity loss on the U.S. joint venture with Gilead of $2 million and
$2 million for the three months ended September 30, 2009 and
2008, respectively, and $7 million and $6 million for the nine
months ended September 30, 2009 and 2008,
respectively.
AstraZeneca
The Company maintains two
worldwide codevelopment and cocommercialization agreements with
AstraZeneca PLC (AstraZeneca), one for the worldwide (except for
Japan) codevelopment and cocommercialization of ONGLYZA
(saxagliptin), a DPP-IV inhibitor (Saxagliptin Agreement), and one
for the worldwide (including Japan) codevelopment and
cocommercialization of dapagliflozin, a sodium-glucose
cotransporter-2 (SGLT2) inhibitor (SGLT2 Agreement). Both compounds
are being studied for the treatment of diabetes and were discovered
by the Company. Under each agreement, the two companies will
jointly develop the clinical and marketing strategy and share
commercialization expenses and profits/losses equally on a global
basis (excluding, in the case of saxagliptin, Japan), and the
Company will manufacture both products. The companies will
cocommercialize dapagliflozin in Japan and share profits/losses
equally. Under each agreement, the Company has the option to
decline involvement in cocommercialization in a given country and
instead receive a royalty.
On July 31, 2009, the
FDA approved ONGLYZA as an adjunct to diet and exercise to improve
blood sugar (glycemic) control in adults for the treatment of type
2 diabetes mellitus. In August 2009, the Company and AstraZeneca
launched ONGLYZA in the U.S. The Company recorded sales of $20
million in third quarter of 2009. Due to the ONGLYZA (saxagliptin)
U.S. launch, the Company received a $100 million milestone payment
from AstraZeneca in September 2009. On October 1, 2009 ONGLYZA
received a Marketing Authorization for use in the EU to treat
adults with type 2 diabetes in combination with either metformin, a
sulfonylurea or a thiazolidinedione, when any of these agents
alone, with diet and exercise, do not provide adequate glycemic
control.
The $250 million in upfront
and milestone payments received by the Company, including the $100
million milestone payment noted above, were deferred and are being
recognized over the useful life of the products into other income.
The Company amortized into other income $4 million and $1 million
of these payments in the three months ended September 30, 2009
and 2008, respectively, and $10 million and $5 million in the nine
months ended September 30, 2009 and 2008, respectively. The
unamortized portion of the upfront and milestone payments was $224
million at September 30, 2009 and $134 million at
December 31, 2008. Additional milestone payments are expected
to be received by the Company upon the successful achievement of
various development and regulatory events as well as sales-related
milestones. Under the Saxagliptin Agreement, the Company could
receive up to an additional $150 million if all development and
regulatory milestones for saxagliptin are met and up to an
additional $300 million if all sales-based milestones for
saxagliptin are met. Under the SGLT2 Agreement, the Company could
receive up to an additional $350 million if all development and
regulatory milestones for dapagliflozin are met and up to an
additional $390 million if all sales-based milestones for
dapagliflozin are met.
Under each agreement, the
Company and AstraZeneca also share in development and
commercialization costs. The majority of development costs under
the initial development plans through 2009 will be paid by
AstraZeneca (with AstraZeneca bearing all the costs of the initial
agreed upon development plan for dapagliflozin in Japan) and any
additional development costs will generally be shared equally. The
net reimbursements to the Company for development costs related to
saxagliptin and dapagliflozin are classified in research and
development expenses and were $2 million and $29 million for the
three months ended September 30, 2009 and 2008, respectively,
and $31 million and $110 million for the nine months ended
September 30, 2009 and 2008, respectively.
Pfizer
The Company and Pfizer Inc.
(Pfizer) maintain a worldwide codevelopment and cocommercialization
agreement for apixaban, an anticoagulant discovered by the Company
being studied for the prevention and treatment of a broad range of
venous and arterial thrombotic conditions.
The Company received $290
million in upfront payments in the two year period ended
December 31, 2008. In addition, the Company received a $150
million milestone payment in April 2009 for the commencement of
Phase III clinical trials for prevention of major adverse
cardiovascular events in acute coronary syndrome. The Company
amortized into other income $7 million and $5 million of the
upfront and milestone payments in the three months ended
September 30, 2009 and 2008, respectively, and $19 million and
$14 million for the nine months ended September 30, 2009 and
2008, respectively. The unamortized portion of the upfront and
milestone payments was $392 million at September 30, 2009 and
$261 million at December 31, 2008. Pfizer will fund 60% of all
development costs effective January 1, 2007 going forward, and
the Company will fund 40%. The net reimbursements to the Company
for apixaban development costs are classified in research and
development expenses and were $49 million and $42 million for the
three months ended September 30, 2009 and 2008, respectively,
and $136 million and $125 million for the nine months ended
September 30, 2009 and 2008, respectively. The Company may
also receive additional payments from Pfizer of up to an additional
$630 million based on development and regulatory milestones. The
companies will jointly develop the clinical and marketing strategy,
will share commercialization expenses and profits/losses equally on
a global basis, and will manufacture product under this
arrangement.
Exelixis
In December 2008, the
Company and Exelixis, Inc. (Exelixis) entered into a global
codevelopment and cocommercialization arrangement for XL184 (a
MET/VEG/RET inhibitor), an oral anti-cancer compound, and a license
for XL281 with utility in RAS and RAF mutant tumors under
development by Exelixis. Under the terms of the arrangement, the
Company paid Exelixis $195 million in 2008 upon execution of the
agreement, and paid an additional $45 million in the first nine
months of 2009, all of which was expensed as research and
development in 2008. Exelixis will fund the first $100 million of
development for XL184. If Exelixis elects to continue sharing
development, Exelixis will fund 35% of future global development
costs (excluding Japan) and share U.S. profits/losses equally and
has an option to copromote in the U.S.; failing such elections,
Exelixis receives milestones and royalties on U.S. sales. The
Company will fund 100% of development costs in Japan. In addition
to royalties on non-U.S. sales, the Company could pay up to $610
million if all development and regulatory milestones are met on
both compounds and up to an additional $300 million if all
sales-based milestones are met on both compounds.
In addition, the Company
and Exelixis have a history of collaborations to identify, develop
and promote oncology targets. In January 2007, the Company and
Exelixis entered into an oncology collaboration and license
agreement under which Exelixis is responsible for the
identification and preclinical development of small molecule drug
candidates directed against mutually selected targets. Under the
terms of this agreement, the Company paid Exelixis $60 million of
upfront fees in 2007. During 2008, the Company paid Exelixis $40
million in IND acceptance milestones. If Exelixis elects to
codevelop and copromote in the U.S., both parties will equally
share development costs and profits. If Exelixis opts out of the
codevelopment and copromotion agreement, the Company will take over
full development and U.S. commercial rights, and, if successful,
will pay Exelixis development and regulatory milestones up to $380
million and up to an additional $180 million of sales-based
milestones, as well as royalties.
Since July 2001, the
Company has held an equity investment in Exelixis, which at
September 30, 2009 represented less than 1% of their
outstanding shares.
ZymoGenetics
In January 2009, the
Company and ZymoGenetics, Inc. (ZymoGenetics) entered into a global
codevelopment arrangement in the U.S. for PEG-Interferon lambda, a
novel type 3 interferon for the treatment of hepatitis C. Under the
terms of the arrangement, the Company paid ZymoGenetics $130
million of upfront and milestone payments in the first nine months
of 2009, all of which was expensed as research and development.
ZymoGenetics will fund the first $100 million of global development
for PEG-Interferon lambda after which, ZymoGenetics will fund 20%
of development costs in the U.S. and Europe and the Company will
fund 100% of the development costs in the rest of the world. If
ZymoGenetics elects to continue sharing development and
commercialization costs in the U.S., ZymoGenetics will share 40% of
U.S. profits/losses and has an option to copromote in the U.S.
Failing such election to fund development costs in the U.S.,
ZymoGenetics will receive royalties on U.S. sales. The Company will
pay ZymoGenetics royalties on all non-U.S. sales. In addition, the
Company could pay up to $405 million if all hepatitis C development
and regulatory milestones are met; up to $287 million if
development and regulatory milestones for other potential
indications are met; and up to an additional $285 million if all
sales-based milestones are met.
|
| 4 |
GILEAD SCIENCES INC |
9. COLLABORATIVE
ARRANGEMENTS
As a result of
entering into strategic collaborations from time to time, we may
hold investments in non-public companies. We review our interests
in our investee companies for consolidation and/or appropriate
disclosure based on the guidance in the Consolidation Topic
of the FASB ASC. As of September 30, 2009, we determined that
certain of our investee companies are variable interest entities;
however, other than with respect to our joint ventures with BMS, we
are not the primary beneficiary and therefore do not consolidate
these investees.
Bristol-Myers Squibb
Company
North
America
In December
2004, we entered into a collaboration with BMS in the United States
to develop and commercialize a single tablet regimen containing our
Truvada and BMS’s Sustiva (efavirenz), which we sell as
Atripla. The collaboration is structured as a joint venture and
operates as a limited liability company named Bristol-Myers
Squibb & Gilead Sciences, LLC, which we consolidate. The
ownership interests of the joint venture and thus the sharing of
product revenue and costs reflect the respective economic interests
of BMS and us and are based on the proportions of the net selling
price of Atripla attributable to efavirenz and Truvada. Since the
net selling price for Truvada may change over time relative to the
net selling price of efavirenz, both BMS’s and our respective
economic interests in the joint venture may vary
annually.
We share
marketing and sales efforts with BMS and both parties are obligated
to provide equivalent sales force efforts for a minimum number of
years. We are responsible for accounting, financial reporting, tax
reporting and product distribution for the joint venture. Both
parties provide their respective bulk active pharmaceutical
ingredients to the joint venture at their approximate market
values. In July 2006, the joint venture received approval from the
FDA to sell Atripla in the United States. In September 2006,
we and BMS amended the joint venture’s collaboration
agreement to allow the joint venture to sell Atripla into Canada
and in October 2007, the joint venture received approval from
Health Canada to sell Atripla in Canada. As of September 30,
2009 and December 31, 2008, the joint venture held efavirenz
active pharmaceutical ingredient which it purchased from BMS at
BMS’s estimated net selling price of efavirenz in the U.S.
market. These amounts are included in inventories on our
Consolidated Balance Sheets. As of September 30, 2009 and
December 31, 2008, total assets held by the joint venture were
$1.28 billion and $1.07 billion, respectively, and consisted
primarily of cash and cash equivalents, accounts receivable
(including intercompany receivables with Gilead) and inventories.
As of September 30, 2009 and December 31, 2008, total
liabilities held by the joint venture were $996.9 million and
$548.0 million, respectively, and consisted primarily of accounts
payable (including intercompany payables with Gilead) and other
accrued expenses. These asset and liability amounts do not reflect
the impact of intercompany eliminations that are included in the
Condensed Consolidated Balance Sheets. Although we are the primary
beneficiary of the joint venture, the legal structure of the joint
venture limits the recourse that its creditors will have over our
general credit or assets.
Europe
In December
2007, Gilead Sciences Limited (GSL), one of our wholly-owned
subsidiaries in Ireland, and BMS entered into a collaboration
arrangement to commercialize and distribute Atripla in the European
Union, Norway, Iceland, Switzerland and Liechtenstein (the European
Territory). The parties formed a limited liability company which we
consolidate, to manufacture Atripla for distribution in the
European Territory using efavirenz that it purchases from BMS at
BMS’s estimated net selling price of efavirenz in the
European Territory. We are responsible for product distribution,
inventory management and warehousing. Through our local
subsidiaries, we have primary responsibility for order fulfillment,
collection of receivables, customer relations and handling of sales
returns in all the territories where we co-promote Atripla with
BMS. We are also responsible for accounting, financial reporting
and tax reporting for the collaboration. In December 2007, the
European Commission approved Atripla for sale in the European
Union. As of September 30, 2009 and December 31, 2008,
efavirenz purchased from BMS at BMS’s estimated net selling
price of efavirenz in the European Territory is included in
inventories on our Consolidated Balance Sheets.
The parties
also formed a limited liability company to hold the marketing
authorization for Atripla in Europe. We have primary responsibility
for regulatory activities and we share marketing and sales efforts
with BMS. In the major market countries, both parties have agreed
to provide equivalent sales force efforts. Revenue and cost sharing
is based on the relative ratio of the respective net selling prices
of Truvada and efavirenz.
Tibotec
Pharmaceuticals
In July 2009,
GSL entered into a license and collaboration agreement with Tibotec
Pharmaceuticals (Tibotec), a wholly-owned subsidiary of
Johnson & Johnson, to develop and commercialize a new
once-daily fixed-dose combination (the Combination Product)
containing our Truvada and Tibotec’s investigational
non-nucleoside reverse transcriptase inhibitor, TMC278 (25 mg
rilpivirine hydrochloride), which is currently in Phase 3 clinical
trials. Under the agreement, Tibotec granted us an exclusive
license to the Combination Product for administration to adults in
a once daily, oral dosage form, worldwide excluding low-income
countries and Japan. Neither party is restricted from combining its
drug products with any other drugs.
In accordance
with the terms of the agreement, we will reimburse up to
€71.5 million (approximately $100.0 million) of
development costs incurred by Tibotec for TMC278 through December
2011, and we are required to use commercially reasonable efforts to
develop and formulate the Combination Product, including the
completion of bioequivalence studies. For the three months ended
September 30, 2009, we recorded $52.4 million in reimbursable
R&D expenses incurred by Tibotec in the development of TMC278.
Tibotec is required to use commercially reasonable efforts to
develop TMC278 and obtain its approval in the United States and
Europe. We will manufacture the Combination Product and assume the
lead role in registration, distribution and, subject to regulatory
approval, commercialization of the Combination Product in the
licensed countries. Tibotec will have the right to detail the
Combination Product in the licensed countries, and, at its option,
can request that it be the distributor of the Combination Product
in a limited number of such countries. The price of the Combination
Product is expected to be the sum of the price of Truvada and the
price of TMC278 purchased separately. We expect to recognize
product sales revenue from future sales of the Combination Product
if and when it is approved. The cost of TMC278 to be purchased by
us from Tibotec for the Combination Product will approximate the
market price of TMC278, less a specified percentage of up to
30%.
Either party
may terminate the agreement if the Combination Product is withdrawn
from the market, if a party materially breaches the agreement or if
certain clinical or regulatory conditions are not met. We may
terminate the agreement in the United States and Canada on or after
the expiration of the last to expire patent for tenofovir
disoproxil fumarate in the United States, and may terminate the
agreement in any other country on or after the expiration of the
last to expire patent for tenofovir disoproxil fumarate in a
country of the European Union. Tibotec may terminate the agreement
in the United States and Canada on or after the expiration of the
last to expire patent for TMC278 in the United States, and may
terminate the agreement in any other country on or after the
expiration of the last to expire patent for TMC278 in a country of
the European Union.
|
| 5 |
Lilly Eli & Co |
We often enter into collaborative arrangements to develop and commercialize drug candidates. Collaborative activities might include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These collaborations often require milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the third party. Revenues related to products sold by us pursuant to these arrangements are included in net product sales, while other sources of revenue (e.g., royalties and profit share payments) are included in collaboration and other revenue. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments made to or reimbursements received from our collaboration partners. Each collaboration is unique in nature, and our more significant arrangements are discussed below. Erbitux Prior to our acquisition, ImClone entered into several collaborations with respect to Erbitux, a product approved to fight cancer, while still in its development phase. The most significant collaborations operate in these geographic territories: the U.S., Japan, and Canada (Bristol-Myers Squibb Company); and worldwide except the U.S. and Canada (Merck KGaA). The agreements are expected to expire in 2018, upon which all of the rights with respect to Erbitux in the U.S. and Canada return to us. The following table summarizes the revenue recognized with respect to Erbitux: | | Three Months Ended September 30, 2009 | Nine Months Ended September 30, 2009 | | | (Dollars in millions) | | Net product sales........................................... | $ 22.3 | $ 72.3 | | Collaboration and other revenue...................... | 79.6 | 223.5 | | Total revenue................................................. | $101.9 | $ 295.8 | Bristol-Myers Squibb Company Pursuant to a commercial agreement with Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS), relating to Erbitux, ImClone is co-developing and co-promoting Erbitux in the U.S. and Canada with BMS, exclusively, and in Japan with BMS and Merck KGaA. The companies have jointly agreed to expand the investment in the ongoing clinical development plan for Erbitux to further explore its use in additional tumor types. Under this arrangement, Erbitux research and development and other costs, up to threshold amounts, are the sole responsibility of BMS, with costs in excess of the thresholds shared by both companies according to a predetermined ratio. Responsibilities associated with clinical and other ongoing studies are apportioned between the parties as determined pursuant to the agreement. Collaborative reimbursements received by ImClone for supply of clinical trial materials; for research and development; and for a portion of marketing, selling, and administrative expenses are recorded as a reduction to the respective expense line items on the consolidated condensed statement of operations. We receive a distribution fee in the form of a royalty from BMS, based on a percentage of net sales in the U.S. and Canada, which is recorded in collaboration and other revenue. Royalty expense paid to third parties, net of any reimbursements received, is recorded as a reduction of collaboration and other revenue. We are responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active pharmaceutical ingredient (API) for clinical and commercial use in the territory, and BMS will purchase all of its requirements of API for commercial use from us, subject to certain stipulations per the agreement. Sales of Erbitux to BMS for commercial use are reported in net product sales. Merck KGaA A development and license agreement between ImClone and Merck KGaA (Merck) with respect to Erbitux granted Merck exclusive rights to market Erbitux outside of the U.S. and Canada, and co-exclusive rights to market Erbitux with BMS and ImClone in Japan. Merck also has rights to manufacture Erbitux for supply in its territory. We manufacture and provide a portion of Merck’s requirements for API, which is included in net product sales. We also receive a royalty on the sales of Erbitux outside of the U.S. and Canada, which is included in collaboration and other revenue as earned. Collaborative reimbursements received for supply of product; for research and development; and marketing, selling, and administrative expenses are recorded as a reduction to the respective expense line items on the consolidated condensed statement of operations. Royalty expense paid to third parties, net of any royalty reimbursements received, is recorded as reductions of collaboration and other revenue. Exenatide We are in a collaborative arrangement with Amylin Pharmaceuticals (Amylin) for the joint development, marketing, and selling of Byetta® (exenatide injection) and other forms of exenatide such as exenatide once weekly. Byetta is presently approved as an adjunctive therapy to improve glycemic control in patients with type 2 diabetes who have not achieved adequate glycemic control using metformin, a sulfonylurea, and/or a thiazolidinediene (U.S. only), three common oral therapies for type 2 diabetes. Lilly and Amylin are co-promoting exenatide in the U.S. Amylin is responsible for manufacturing and primarily utilizes third-party contract manufacturers to supply Byetta. However, we are manufacturing Byetta pen delivery devices for Amylin. We are responsible for development and commercialization costs outside the U.S. Under the terms of our arrangement, we report as collaboration and other revenue our 50 percent share of gross margin on Amylin’s net product sales in the U.S. We report as net product sales 100 percent of sales outside the U.S. and our sales of Byetta pen delivery devices to Amylin. The following table summarizes the revenue recognized with respect to Byetta: | | Three Months Ended September 30, | Nine Months Ended September 30, | | | 2009 | 2008 | 2009 | 2008 | | | (Dollars in millions) | | | Net product sales........................................... | $ 38.0 | $ 26.0 | $ 100.2 | $ 65.3 | | Collaboration and other revenue..................... | 77.8 | 83.2 | 228.0 | 227.9 | | Total revenue................................................. | $115.8 | $109.2 | $ 328.2 | $ 293.2 | | | | | | | | We pay Amylin a percentage of the gross margin of exenatide sales outside of the U.S., and these costs are recorded in cost of sales. Under the 50/50 profit-sharing arrangement for the U.S., in addition to recording as revenue our 50 percent share of exenatide’s gross margin, we also report 50 percent of U.S. research and development costs and marketing and selling costs in the respective line items on the consolidated condensed statements of operations. A New Drug Application has been submitted to the U.S. Food and Drug Administration (FDA) for exenatide once weekly. Amylin is constructing and will operate a manufacturing facility for exenatide once weekly, and we have entered into a supply agreement in which Amylin will supply exenatide once weekly product to us for sales outside the U.S. The estimated total cost of the facility is approximately $550 million. In 2008, we paid $125.0 million to Amylin, which we will amortize to cost of sales over the estimated life of the supply agreement beginning with product launch. We would be required to reimburse Amylin for a portion of any future impairment of this facility, recognized in accordance with GAAP. A portion of the $125.0 million payment we made to Amylin would be creditable against any amount we would owe as a result of impairment. We have also agreed to loan up to $165.0 million to Amylin at an indexed rate beginning December 1, 2009; any borrowings have to be repaid by June 30, 2014. We have also agreed to cooperate with Amylin in the development, manufacturing, and marketing of exenatide once weekly in a dual-chamber cartridge pen configuration. We will contribute 60 percent of the total initial capital costs of the project, our portion of which will be approximately $130 million. Cymbalta® Boehringer Ingelheim We are in a collaborative arrangement with Boehringer Ingelheim (BI) to jointly market and promote Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and fibromyalgia, outside the U.S. Pursuant to the terms of the agreement, we generally share equally in development, marketing, and selling expenses, and pay BI a commission on sales in the co-promotion territories. We manufacture the product for all territories. Reimbursements or payments for the cost sharing of marketing, selling, and administrative expenses are recorded in the respective expense line items in the consolidated condensed statements of operations. The commission paid to BI is recognized in marketing, selling, and administrative expenses. Quintiles We are in a collaborative arrangement with Quintiles Transnational Corp. (Quintiles) to jointly market and promote Cymbalta in the U.S. Pursuant to the terms of the agreement, Quintiles shares in the costs to co-promote Cymbalta with us and receives a commission based upon net product sales. According to this agreement, Quintiles’ obligation to promote Cymbalta expires in 2009, and we will pay a lower rate on net product sales for three years after completion of the promotion efforts specified in this agreement. The commissions paid to Quintiles are recorded in marketing, selling, and administrative expenses. Effient™ We are in a collaborative arrangement with Daiichi Sankyo Company, Limited (D-S) to develop, market, and promote prasugrel, an antiplatelet agent for the treatment of patients with acute coronary syndromes (ACS) who are being managed with an artery-opening procedure known as percutaneous coronary intervention (PCI). Prasugrel was approved for marketing by the European Commission under the tradename Efient® in February 2009, and the initial sales were recorded in the first quarter of 2009. Prasugrel was also approved for marketing by the FDA under the tradename Effient in July 2009, and the initial sales in the U.S. were recorded in the third quarter. Within this arrangement, we and D-S have agreed to co-promote under the same trademark in certain territories (including the U.S. and five major European markets), while we have exclusive marketing rights in certain other territories. D-S has exclusive marketing rights in Japan. Under the agreement, we paid D-S an upfront license fee and agreed to pay future success milestones. The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we produce the finished product for our exclusive and co-promotion territories. We record product sales in the exclusive and co-promotion territories. In our exclusive territories, we pay D-S a royalty specific to these territories. Profit share payments made to D-S are recorded as marketing, selling, and administrative expenses. All royalties paid to D-S and the third-party manufacturer are recorded in cost of sales. Worldwide Effient sales were $22.6 million in the third quarter of 2009. The product is in the early phases of launch in both the U.S. and Europe. TPG-Axon Capital In 2008, we entered into an agreement with an affiliate of TPG-Axon Capital (TPG) for the Phase III development of a gamma-secretase inhibitor and an A-beta antibody, our two lead molecules for the treatment of mild to moderate Alzheimer’s disease. Under the agreement, both we and TPG will provide funding for the Alzheimer’s clinical trials. Funding from TPG will not exceed $325 million and could extend into 2014. In exchange for their funding, TPG may receive success-based milestones totaling $330 million and mid- to high-single digit royalties that are contingent upon the successful development of the Alzheimer’s treatments. The royalties will be paid for approximately eight years after launch of a product. We record reimbursements received from TPG for its portion of research and development costs as a reduction to research and development expenses on the consolidated condensed statements of operations. The reimbursement from TPG is not expected to be material in any period. Summary of Collaboration Related Commissions and Profit Share Payments The aggregate amount of commissions and profit share payments included in marketing, selling, and administrative expense pursuant to the collaborations described above was $80.8 million and $81.0 million in the quarters ended September 30, 2009 and 2008, respectively, and $243.0 million and $223.5 million in the nine months ended September 30, 2009 and 2008, respectively. |
| 6 |
MERCK & CO INC |
| 5. |
|
Collaborative Arrangements |
| |
|
Merck continues its strategy of establishing strong external alliances to complement its
substantial internal research capabilities, including research collaborations, acquisitions,
licensing preclinical and clinical compounds and technology platforms to drive both near- and
long-term growth. The Company supplements its internal research with an aggressive licensing
and external alliance strategy focused on the entire spectrum of collaborations from early
research to late-stage compounds, as well as new technologies. The Company executes a number of
external arrangements including research and development collaborations, preclinical and
clinical compounds, and technology platforms across a broad range of therapeutic categories.
These arrangements often include upfront payments and royalty or profit share payments,
contingent upon the occurrence of certain future events linked to the success of the asset in
development, as well as expense reimbursements or payments to the third party. |
| |
|
As discussed in Note 1, on January 1, 2009, the Company adopted new guidance which defines
collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and
third parties. The Company reviewed its third party arrangements to determine if any
arrangement is within the scope of this new guidance. Each arrangement is unique in nature and
the Company’s most significant arrangement is discussed below. |
| |
|
In 1989, the Company and E.I. duPont de Nemours and Company (“DuPont”) agreed to form a
long-term research and marketing collaboration to develop a class of therapeutic agents for high
blood pressure and heart disease, discovered by DuPont, called angiotensin II receptor
antagonists, which include Cozaar and Hyzaar. In return, the Company provided DuPont marketing
rights in the United States and Canada to its prescription medicines, Sinemet and Sinemet CR.
Pursuant to a 1994 agreement with DuPont, the Company has an exclusive licensing agreement to
market Cozaar and Hyzaar, which are both registered trademarks of DuPont, in return for
royalties and profit share payments to DuPont. |
|
| 7 |
MORGAN STANLEY |
Japan Securities Joint
Venture. On March 26, 2009, MUFG
and the Company announced that they had signed a memorandum of
understanding to form a securities joint venture between Mitsubishi
UFJ Securities Co., Ltd. and MSJS.
Both parties will work to
conclude definitive agreements regarding the joint venture. The
joint venture is subject to the execution of the definitive
agreements and to regulatory approvals and other customary closing
conditions.
In addition, on
June 30, 2009, MUFG and the Company announced the creation of
a loan marketing joint venture in the Americas starting initially
in the U.S., subject to regulatory approvals and other customary
closing conditions, and business referral arrangements in Asia,
Europe, the Middle East and Africa. MUFG and the Company also
entered into a referral agreement for commodities transactions
executed outside of Japan and a transfer of personnel between MUFG
and the Company for the sharing of best practices and
expertise.
|
| 8 |
PFIZER INC |
Note 4. Collaborative Arrangements
In the normal course of business, we enter into collaborative arrangements with respect to in-line medicines, as well as medicines in development, that require completion of research and regulatory approval. Collaborative arrangements are contractual agreements with third parties that involve a joint operating activity, typically a research and/or commercialization effort, where both we and our partner are active participants in the activity and are exposed to the significant risks and rewards of the activity. Our rights and obligations under our collaborative arrangements vary. For example, we have agreements to co-promote pharmaceutical products discovered by other companies, and we have agreements where we partner to co-develop and/or participate together in commercializing, marketing, promoting, manufacturing, and/or distributing a drug product.
Payments to or from our collaboration partners are presented in the statement of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our partners as alliance revenues, a component of Revenues, when our co-promotion partners are the principal in the transaction and we receive a share in their net sales or profits. Alliance revenues are recorded when our co-promotion partners ship the product and title passes to their customers. Expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In arrangements where we manufacture a product for our partner, we record revenues when our partner sells the product and title passes to its customer. All royalty payments to collaboration partners are recorded as part of Cost of sales.
The amounts and classifications of payments (income/(expense)) between us and our collaboration partners follow:
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
(millions of dollars) |
|
Sept. 27,
2009 |
|
|
Sept. 28,
2008 |
|
|
Sept. 27,
2009 |
|
|
Sept. 28,
2008 |
|
|
Revenues – Revenues(a) |
|
$ |
131 |
|
|
$ |
143 |
|
|
$ |
409 |
|
|
$ |
369 |
|
|
Revenues – Alliance revenues (b) |
|
|
692 |
|
|
|
571 |
|
|
|
1,872 |
|
|
|
1,622 |
|
|
Total Revenues from collaborative arrangements |
|
|
823 |
|
|
|
714 |
|
|
|
2,281 |
|
|
|
1,991 |
|
|
Cost of sales (c) |
|
|
(40 |
) |
|
|
(62 |
) |
|
|
(131 |
) |
|
|
(129 |
) |
|
Selling, informational and administrative expenses(d) |
|
|
27 |
|
|
|
38 |
|
|
|
24 |
|
|
|
57 |
|
|
Research and development expenses(e) |
|
|
(58 |
) |
|
|
(51 |
) |
|
|
(302 |
) |
|
|
(147 |
) |
|
(a) |
Represents sales to our partners of products manufactured by us. |
|
(b) |
Substantially all related to amounts earned from our partners under co-promotion agreements. |
|
(c) |
Primarily related to royalties earned by our partners and cost of sales associated with inventory purchased from our partners. |
|
(d) |
Represents net reimbursements from our partners and reimbursements to our partners for Selling, informational and administrative expenses incurred. |
|
(e) |
Primarily related to net reimbursements earned by our partners, except that the first nine months of 2009 also includes a $150 million milestone payment to one of our partners. |
For the three months and nine months ended September 27, 2009, Other (income)/deductions-net, includes income of $20 million paid to us for the termination of a collaboration agreement.
The amounts disclosed in the above table do not include transactions with third parties other than our collaboration partners, or other costs associated with the products under the collaborative arrangements.
|
| 9 |
Philip Morris International Inc. |
Note 16. Colombian
Investment and Cooperation Agreement:
On
June 19, 2009, PMI announced that it had signed an agreement
with the Republic of Colombia, together with the Departments of
Colombia and the Capital District of Bogota, to promote investment
and cooperation with respect to the Colombian tobacco market and to
fight counterfeit and contraband tobacco products. The Investment
and Cooperation Agreement provides $200 million in funding to the
Colombian governments over a 20-year period to address issues of
mutual interest, such as combating the illegal cigarette trade,
including the threat of counterfeit tobacco products, and
increasing the quality and quantity of locally grown tobacco. As a
result of the Investment and Cooperation Agreement, PMI recorded a
pre-tax charge of $135 million in the operating results of the
Latin America & Canada segment during the second quarter
of 2009. This pre-tax charge, which represents the net present
value of the payments prescribed by the agreement, is reflected in
marketing, administration and research costs on the condensed
consolidated statements of earnings for the nine months ended
September 30, 2009.
|
| 10 |
Questar Corporation |
Note 11 - Change in Ownership Interest
Gas Management constructed a gathering pipeline for $203.5 million and contributed the asset to Rendezvous Gas Services LLC (Rendezvous). Gas Management's ownership interest increased from 50% to 78%. As a result, common stock was reduced by $31.6 million and noncontrolling interest increased by $28.5 million. Rendezvous operates gas-gathering facilities for Pinedale Anticline and Jonah field producers for delivery to various interstate pipelines. |
| 11 |
UNITED TECHNOLOGIES CORP /DE/ |
Note 11: Collaborative Arrangements
In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, revenues and risks are shared. Revenues generated from engine programs, spare parts sales, and aftermarket business under collaboration arrangements are recorded as earned in our financial statements. Amounts attributable to our collaborative partners for their share of revenues are recorded as an expense in our financial statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement of the collaborator’s share of program costs is recorded as a reduction of the related expense item at that time. As of September 30, 2009, the collaborators’ interests in existing engine production programs ranged from 1 percent to 29 percent. Pratt & Whitney directs those programs and is the principal participant in all existing collaborative arrangements. There are no individually significant collaborative arrangements and none of the partners exceed 25 percent share in an individual program.
The following table illustrates the income statement classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented: | | | | Quarter Ended | | Nine Months Ended | | | | | September 30, | | September 30, | | (in millions of dollars) | | 2009 | | 2008 | | 2009 | | 2008 | | Collaborator share of revenues: | | | | | | | | | | | | | | | Cost of products sold | | | $ 167 | | | $ 267 | | | $ 567 | | | $ 794 | | | Cost of services sold | | | 7 | | | 4 | | | 21 | | | 11 | | | | | | | | | | | | | | | | | Collaborator share of program costs | | | | | | | | | | | | | | | (reimbursement of expenses incurred): | | | | | | | | | | | | | | | Cost of products sold | | | (14) | | | (20) | | | (47) | | | (63) | | | Research and development | | | (14) | | | (11) | | | (46) | | | (34) | | | Selling, general and administrative | | | (1) | | | (3) | | | (4) | | | (8) |
The Collaborative Arrangements Topic of the FASB ASC requires that participants in a collaborative arrangement report costs incurred and revenues generated from such transactions on a gross basis and in the appropriate line items in each company’s financial statements. This is pursuant to the guidance in the Revenue Recognition Topic of the FASB ASC that addresses whether an entity should report revenue gross or net depending on whether the entity functions as a principal or agent. The Collaborative Arrangements Topic also requires disclosure of the nature and purpose of the participant’s collaborative arrangements, the participant’s rights and obligations under these arrangements, the accounting policy for collaborative arrangements, the income statement classification and amounts attributable to transactions arising from collaboration arrangements between participants, and the disclosure related to individually significant collaborative arrangements. These requirements were effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date.
We adopted the provisions of the Collaborative Arrangements Topic as of January 1, 2009. As required, we have applied the provisions retrospectively for all periods presented. As a result, the collaborators’ share of revenues, which were previously reported on a net basis, are now reported on a gross basis. Certain reclassifications were made to the prior year amounts in both the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations. In the Condensed Consolidated Balance Sheet, accounts receivable and accounts payable were each increased by $368 million at December 31, 2008, in order to reflect the amounts owed to our collaborative partners for their share of revenues on a gross basis.
The following table illustrates the effect of the retroactive application on our Revenues and Costs and Expenses for all collaborative arrangements existing as of the effective date:
| | | | Quarter Ended September 30, 2008 | | Nine Months Ended September 30, 2008 | | (in millions of dollars) | | As
Previously Reported | | Effect of Retroactive Application | | Currently Reported | | As
Previously Reported | | Effect of Retroactive Application | | Currently Reported | | Revenues: | | | | | | | | | | | | | | | | | | | | | Product sales | | $ | 10,735 | | $ | 267 | | $ | 11,002 | | $ | 31,810 | | $ | 794 | | $ | 32,604 | | | Service sales | | | 3,967 | | | 4 | | | 3,971 | | | 12,004 | | | 11 | | | 12,015 | | | Other income, net | | | 112 | | | - | | | 112 | | | 368 | | | - | | | 368 | | | | | | 14,814 | | | 271 | | | 15,085 | | | 44,182 | | | 805 | | | 44,987 | | Costs and Expenses: | | | | | | | | | | | | | | | | | | | | | Cost of products sold | | | 7,979 | | | 267 | | | 8,246 | | | 23,882 | | | 794 | | | 24,676 | | | Cost of services sold | | | 2,685 | | | 4 | | | 2,689 | | | 8,122 | | | 11 | | | 8,133 | | | Research and development | | | 436 | | | - | | | 436 | | | 1,281 | | | - | | | 1,281 | | | Selling, general and
administrative | | | 1,665 | | | - | | | 1,665 | | | 5,075 | | | - | | | 5,075 | | Operating profit | | $ | 2,049 | | $ | - | | $ | 2,049 | | $ | 5,822 | | $ | - | | $ | 5,822 |
|